Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to BBVA Frances' 2nd Quarter 2018 Results Conference Call. We would like to inform you that this event is being recorded and all participants will be in listen only mode during both companies' presentation. After the company's remarks are completed, there will be a question and answer section. At that time, further instructions will be given.
First of all, let me stress that some of the statements made during this conference call may be forward looking statements within the meaning of the Safe Harbor provisions found in Section 27A of the Securities Act of 1933 under U. S. Federal Securities Law. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward looking statements. Additional information concerning these factors is contained in BBVA France's Annual Report on Form 20 F for the fiscal year 2017 filed with the U.
S. Securities and Exchange Commission. Today with us, we have Mr. Ernesto Gallardo, CFO Mr. Diego Cessarini, Finance and Investor Relations Manager and Mrs.
Cecilia Acuna, Head of Investor Relations. Mrs. Acunya, you may begin your conference.
Thank you. Good morning, everyone. As usual, I will start with a brief summary on the most important topic of the Q2 of 2018, and then we'll be open to questions. Now I'd like to make a brief review on the macroeconomic environment. The company suffered a contraction beginning in the Q2 of 2018 as a result of the drought occurred during the 1st month of the year and the sudden depreciation of the peso that resulted in higher interest rate and higher inflation than expected.
Such increase in rates, a higher financial uncertainty and the increase in cash reserve requirements implemented by the Central Bank, 1100 basis points, has contributed to a slowdown in the pace of growth of financial intermediation activity with the private sector in real terms. It should be noted that in this environment, banking deposits maintain a good performance, although slowing down the pace of growth and that the financial system continue with solid levels of liquidity and solvency. I'd like to make a brief review on the bank's performance. First of all, I'd like to remind you that since January 1, 20 18, figures are reported in accordance with IFRS. Having said this, in the Q2 of 20 18, BBVA Frances reached a net income of ARS2.1 billion, 37.4 percent and 112.9 percent higher than the net income or decrease in the previous quarters and in the Q2 of 20 17.
In the last slide, we stated for comparative purposes. During the Q2 of 2018, the ROE reached 3.5% and the ROA 26.4% compared to 2.9% and 20.3% published in the previous quarter, respectively. Net operating income reached ARS 8,200,000,000, increasing 16.1%
compared to
the previous quarter, driven by higher net interest income, fees and foreign exchange result, both in trading and portfolio activity. Operating expenses reached MXN 5,200,000,000, an increase of 8 point 7% compared to the previous quarter, consequence of higher administrative expenses, which grew as a result of the rise of transportation of cash, cash 45.3%, mainly during the 12 months of the consequence of the FX volatility. Personal expenses increased by 1.4% during the same period. The efficiency ratio in the quarter reached 49.4%, showing an improvement of around 700 basis points compared to the previous quarter. In connection to the activity level, at the end of June 20 18, the private restaurant portfolio totaled ARS 162.1 billion, increasing 16.3% during the quarter and 82.6% in the last 12 months.
Loan consolidated market share was 8.24%, showing an increase of 68 basis points in the last 12 months. Credit growth was affected during the 2nd quarter by the devaluation of peso and higher interest rates, resulting in a strong increase of loan in dollars, 40.2%, mainly due to the reexpression of the new value of the currency and a mild growth in pesos of 8.5%. With regard to loans to individuals, credit card loans recorded a positive performance, offsetting the slowdowns in the demand for mortgages and personal loans. Commercial loans tended to moderate growth and were focused on short term terms. Although as a result of the central closure of Capital Markets, it was possible to see more interest from certain companies, especially larger financial companies over longer term.
As of June 30, 2018, the asset quality ratio was 0.86 percent with a recovery ratio of 2 23%. The cost of risk reached 1.49%, 17 basis points above the last quarter due to some deterioration, mainly on the repo portfolio. Results that affected the country during the 1st month of the year did not have a significant impact on the affected portfolio. Total deposits reached ARS192,900,000,000 at the end of June, increasing 20.6 percent compared to the previous quarter and 53.6% compared with the Q2 of 2017. Foreign currency deposits remained stable during the quarter, but the balance reflects the depreciation of the peso.
Local currency deposits increased 8.3%, mainly due to increases in saving account and current account with interest. PBBS, Francesca continues to show an adequate level of solvency. At the end of June, the total capital ratio was 14.6%, and the TRO ratio was 13.4%. Thank you very much. We are now ready to answer your questions.
Thank you. The floor is now open for questions. Our first question will come from Gabriel da Nobrega with Citibank. Please go ahead.
Hi, everyone. Thank you for the opportunity. I have a question regarding your assets and liability side. I just want to understand how fast are you able to reprice your assets and your liabilities as well? Moreover, with the current increase in the reserve rate requirements to 11% and out of those 6% that cannot be remunerated.
How should we look at your margin going forward? And I'll make the second question answer. Thank you.
Gabriel, this is Diego Cesarini. Thank you for the question. Well, I will split the balance sheet in 2. 1st, in the dollar balance sheet, which represents approximately 25% to 30% of our total loans. When we do not pay interest on the deposit side.
So loans reprice approximately 1 5th or 1 6th of our portfolio every month. So it's a very short duration portfolio, so which reprice is very quick. But I guess that you're worried about your our peso book regarding our peso book, our time deposit base, which is the one that repriced and our remunerated current accounts, represent approximately 45% of our total book. And we hold approximately the same amount of money in short term loans and the lease or the bags. So the speed of reprisal is similar in the on assets and on liabilities.
What we have seen in the past 3 months is that the increase in loan rates have been, in general terms, more aggressive than on deposits. Just as an example, our deposit base, our time deposit base has gone from a 21% rate to a 30% to 31% right now. And our overdraft portfolio, our discount of documents or our Lalix or these kind of lines that are very short term. They have gone from levels of 26 or 28 to levels of 42% in case of documents or 50%, 51% in case of overdrafts. The same happened, of course, with the Lebagg's positions that have gone from 27% interest rate to 44% approximately.
Looking at the future, of course, these reserve requirements increases that the Central Bank has been regulated during the last couple of months have an impact, And we have to we're trying to keep some deposit costs in the in our remunerated accounts as low as possible, but it depends, of course, on the market. So we have without that, we have some impact on these increases of reserve requirements. Regarding our NIM, probably our NIM has an impact on interest rate swaps in the Q2. Probably that will not be present in the Q3. So my guess is that NIMs should go or they should be stable even with increasing in reserve requirements or they may follow little, but there will not be much damage comparing with the previous quarter.
All right. That's very clear. And as for my second question, it's regarding your asset quality. What are you beginning to see in terms of trends? We saw that during the quarter, your NTR ratio actually deteriorated 40%.
I I see that it's still the lowest NTR ratio among the other Argentine banks. So if you could give us more colors on what you're seeing in terms of trends? And as well if I could ask, on your coverage ratio, we thought that it continued to be well above 200%. Do you maybe have a comfortable level? Do you expect maybe your coverage ratio to decrease over the coming quarters?
Thank you.
Okay. I will start by the second one. The coverage ratio has gone down from 250 approximately to 223, I guess. That is mainly because our NPL portfolio has grown. We went from 71 basis points to 87 percent and the coverage ratio going down, just a logical consequence of that calculation.
Probably, it can go down a little more. I cannot tell you exactly where I think it will be by the end of the year, but probably the trend will keep. Regarding asset quality in general terms, well, I would begin by saying that we are comfortable with our asset quality. We have always highlighted the good performance of our portfolio in the past. And I think that at this moment, even if you can see some deterioration, we keep being comfortable.
When we look at our provisions, we are still in the by the end of this Q2, we are still under our budget. So we were expecting at the beginning of the year some deterioration on this portfolio. And probably in the 2nd semester, this process will continue and we could figure out that we will land some maybe 10% above our estimates at the beginning of the year. So our cost of risk that right now stands at 1.49, I guess, we think that, that could end around 1.6, 1.60, but it's not such a bad situation comparing with the environment.
Our next question comes from Frederic de Maris with UBS. Please go ahead.
Thank you. Good morning, everyone. Diego and Silvia, thanks for the opportunity.
A couple of questions. The first one is
a follow-up on the previous question on asset quality. When you think of that increase from 149% in cost of risk to 1 the pressure on asset quality could come from? Are you mostly focused on consumers because of inflation? Or is it mostly because of some corporates? And also in that team of corporates, any sector that concerns you, maybe construction, maybe something else, that would be for asset quality?
And then my second question has to be on with efficiency. You've had one of the most successful and aggressive digital strategy. So I just wanted to get an update on where you stand in the strategy and also what it means in terms of potential efficiency gains.
Okay. Well, thank you, Frederic. Well, starting with the risk issue, well, what we are seeing is some deterioration mainly on the retail side of the portfolio. This is basically credit cards. We of course, our trend maybe the slope of our the duration is clearly below the average of the market.
And even in after May, after the month of May, where some salary increases were seen across the industries, we saw some deceleration of this process. But even though I think we think that the most burden will come from this retail portfolio in the coming quarters. Regarding small companies, we have seen some small some few cases with problems, but in general terms, nothing serious. We were worried at the beginning of the last quarter because of the severe drought that Argentina has suffered. But during July, when we recovered most of our agro loans, things were normal.
We got our credit agro credit cards repaid without any kind of problems. So still, we are not seeing nothing serious across the small companies scope. Regarding efficiency, well, we have closed a good quarter with slightly below 50. We were forecasting for the whole year an average in the low 50s. I think that we are already on track on that and we will probably get those ratios.
The bank has been very prudent on costs during the last quarters. We have a strategy of not growing in branches. We have kept the same level of around 250 for the last years. And I think that, that situation will continue. We our digital strategy is working well.
Every quarter, we see more people, more customers working on our web, on our cell phone application and more products are sold online instead of people going to the branches, which are now being more focused on adding value to customers. Lots of operations that were performed through physical human cashiers have been withdrawn and now people are direct to the automatic sellers or whatever. So I think that we will keep on that line. We have not suffered a very small portion of our costs are related to FX. So we didn't suffer the revaluation of the currency.
What we saw during the last quarter was increase in the cost of transportation of banknotes to the branches. That was mainly because the FX volatility and people demanding more bills, more dollars, but that has already subsided in the following months. So I think that things are going well in terms of efficiency for the bank and we have the intention to keep lowering that ratio next year, of course.
Your next question comes from Alonso Garcia with Credit Suisse. Please go ahead.
Thank you. Good morning, everyone. My question is regarding loan growth. My question is, I mean, for how long do you see that credit demand can be sustained in Argentina under this interest rate environment? And where could demand continue to come from in that same scenario?
And when do you expect of course, this is a difficult question, but when would you expect a more normalized situation in terms of interest rates to help further improvement in trade growth? And regarding also the loan growth outlook, my question is, do you see the construction sector as an opportunity given the PPP projects in Argentina? Or do you have a cautious stance given all the noise that is going on in the sector right now?
Well, thank you, Alonso. I'll start with the last one, and I hope I will remember the first one. Regarding loan construction sector, we are we have little very little exposure to that sector. Approximately, it's 1.5% of our total portfolio. So my first take here is we have not been very aggressive in the past.
I think that this is not the best moment to start being more aggressive on that. Regarding credit, well, we have seen some slowdown in the of course, in the second quarter, that keeps in the trend keeps and probably accelerated in the Q3. The reason for that the first reason, of course, is the raising rates. As I mentioned before, most credit lines have increased the rates by 15 or 20 percentage points. So for of course, that brings less demand from our customers.
The general environment, economical, political, financial, of course, helps also for having less demand. And the third thing is that, well, Central Bank probably wants banks not to lend as much as they were lending because if not, we wouldn't have suffered 11th point of increase in reserves. So I would say that right now, if most Argentinian banks wanted even if they wanted to and they had loan demand, they will feel some constraint on funding not on funding, but on these reserves issues. So what I foresee is that with this new strategy by Central Bank of decreasing the stock of Lebax sooner than we were all expecting, a strategy that personally we think it's good. They will have more possibilities of decreasing rates in the coming months.
Not probably in the coming 1, 2 or 3 months, but they will be more free to move rates down sooner than expected. Probably, this means that inflation and the FX volatility should have been contained by Como Oblast by that moment. If not, probably we will we can expect rates to be kept at this level for some more months. We still expect the bank to grow between 45% 50% this year. Of course, a good part of this growth comes from the evaluation of the currency.
We are expecting peso loans to grow around 25% this year, and the rest, of course, comes from the dollar activity and the depreciation of the currency. And for next year, we are expecting we're forecasting a growth of around 35%.
35% next year?
Yes.
Perfect. Thank you very much for your answer.
You're welcome.
Our next question comes from Carlos Gomez with HSBC. Please go ahead.
Thank you very much. Two questions, Leo. First one, you said you expect 35% loan growth next year. What do you expect inflation to be next year and becoming this? What is the path of inflation in your projection?
And we understand it's difficult to protect right now. 2nd, any news on the Prisma sale?
Well, regarding inflation, Carlos, we are expecting for next year a level of 22%. So growth will be approximately 13 points in real terms,
similar to the growth
we will have in this year. We are expecting a 33% for 2018. And no, we don't have any news about business sales. Really, I can't give you any color on that.
It was supposed to happen this year, right? Yes.
I guess it was supposed to be this year.
And at this time, I'm showing no further questions. So I would like to turn the floor back to Ms. Acuna for any closing remarks.
Thanks again for joining us. And if you have any further questions, please contact us in our offices.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.